There are plenty of similarities to the old firm in the latest “new Deutsche Bank” strategy, released on Sunday and explained by the bank’s management in a call on Monday afternoon. For a start, there’s the farce of a fourth capital increase in seven years. Every capital increase, of course, is the last one – the final cash injection needed to turn the firm around and set it on a new course.
The bank raised €10.2bn in 2010, €2.8bn in 2013, €8.5bn in 2014, and now plans another €8bn. Market wags have noted that the bank’s €23.7bn market cap doesn’t look terribly impressive, set in that context.
The new plan also recombines banking and markets, which were split apart in 2015. Now the division is called “Corporate and Investment Banking”, instead of “Corporate Banking and Securities”, and also contains the bank’s transaction banking business, but it still looks like a U-turn.
There’s also what appears to be, at first blush, a revival of a non-core unit — a book of legacy assets, largely complex or poorly collateralised derivatives in markets, which will be managed separately. The bank was keen to emphasise, in its presentation to analysts, that this new carve-out of unwanted assets was different to the Non-Core Operations Unit, closed at the end of 2016.
Apparently, the bank is in less of a hurry to sell the books, and is happier to sit on these assets and wind them down if need be — but even if it doesn’t look like the previous DB non-core unit, it’s certainly a non-core unit of some kind.
Other familiar elements are tech, and cost-cutting. Like all banks, IT investment is a big part of the new plan. Deutsche is supposed to be spending extensively on better, faster, more reliable systems giving more up-to-date readings of the bank’s risk positions and cutting down on back and middle office time and resources.
But what’s new, distinctive — and underrated — is that Deutsche is now planning, explicitly, to be a high capital bank, higher than it needs to be, and is pitching this as a strength of the firm.
CEO John Cryan even argued, in the analyst presentation, that the capital raising, and running the firm at a higher-than-necessary capital ratio, would lower the firm’s funding costs which would “drop straight to the bottom line”.
He’s correct, of course — higher capital levels do lower funding costs — but bank chief executives have strained every nerve to argue against higher capital levels for the last seven years, arguing that this would raise costs for bank lending and damage the real economy. The argument for the benefit of lower funding costs has been the preserve of bank critics (it’s the core of The Bankers’ New Clothes, by Anat Admati and Martin Hellwig).
This partly reflects Deutsche’s recent history. Twice in 2016 the bank was buffeted by market concerns about its capital levels, and lost serious money as a result. Some 20% of its prime brokerage balances left, taking with them equities trading and equity derivatives revenue. It was, as Cryan said, “an episode we didn’t want to go through again”.
Deutsche will also find it easier to “run at higher capital levels”, given probable postponement or abandonment of Basel IV. Even if the Committee can agree on the new rules, they seem unlikely to arrive in Europe before 2021 — and even then, will come with a long phase-in period. Of course, Basel IV was just a way of measuring risk, and would have been irrelevant to the actual tangible capital supporting Deutsche’s balance sheet, but still, the all-important CET1 number can be higher as a result. Deutsche has downgraded its leverage ratio target though, since it now plans to keep the large low-risk, high leverage Postbank portfolio.
Even if it is making a virtue of necessity, choosing to run at higher capital levels still marks a distinct philosophical shift from the Deutsche of old, and from plenty of other firms in the market. Deutsche’s new capital increase gets it to 14.1% fully loaded CET1, and it targets “comfortably above 13%” once it’s deployed the new funds.
HSBC has historically been near the top of global bank capital ratios — but is happy to target a CET1 ratio lower than Deutsche’s, and to hand any excess back to shareholders. Goldman’s management said it would happily run with lower capital levels if regulation permitted.
Credit Suisse, meanwhile, another firm in turnaround mode, is hoping to grind out more capital over the next four years with tight cost control, earnings, and, if necessary, the partial sale of its best businesses. Like Deutsche, it has a major rights issue in the recent past, which it will be loath to revisit. But that condemns CS to competing on a shoe-string — fighting for above-average returns on below-average capital deployment.
Deutsche, though, appears to be leaving the old ways behind, and making sure it’s not just adequately, but plentifully capitalised. GlobalCapital is pleased not to be a Deutsche shareholder (or, indeed, an employee holding out for the return of discretionary pay), but the new strategy might be enough of a departure to make a difference.